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Home > Business > Special

Why you should ignore the Sensex

Chandnee Sinha | May 30, 2007

When was the last time you saw a stock market analyst saying 'I don't know.'

Analysts always seem to have an explanation for everything. "On why did the market rise today?" or "will the market fall tomorrow?" or, for that matter, "Why nothing happened in the markets today?" This must be the only profession where individuals always have something to say about nothing. Amazes me.

The point is, something that seems sensible can always be said about the stock market. But does it really help? On May 10, 2006, the Sensex touched the then all-time high of 12,612.38 points. There were analysts who remained bullish even then.

If you were the kind who had listened to them and bought into the market at that point of time, 8 days later you would have seen the market fall to 11,391.43 points. This would mean a loss of 10.7% on your original investment, assuming you had invested in the same proportion as the stocks that constitute the Sensex.

If you had held on and sold out in frustration finally on June 14, 2006, when the market touched 8,929.44, and you just couldn't take it anymore, then you would have lost 29.2% of your original investment in a matter of just five weeks.

Between May 10, 2006 and May 25, 2007, the Sensex has given a return of 13.7%. But it is highly unlikely that those who had bought on May 10, 2006 would be still holding on to the stocks.

In the bloodbath that followed after that date, it would have been very difficult to hold one's nerve and stay invested. And more than that 13.7% from the stock market is not a great consider during a time when even one year fixed deposits give a guaranteed return of 10%, for a one year period.

Now during the same time period of May 10, 2006 and May 25, 2007, investors could have easily made 26-28% by investing in the Sensex. And at the same time they could have adopted what I call the 'fill it, shut it, forget it' mode of investing.

All that was needed was to invest an equal amount in the Sensex every month. Now how do you do that? By starting a systematic investment plan on an index fund that tracks the Sensex.

An index fund invests money in stocks that constitute a stock market index, in the same proportion as their weightage in the index.

By investing equal amount every month in the Tata Index Fund - Sensex Plan - Option A, which is an index fund on the Sensex, an investor could have earned a return of 28.40% per annum.

The assumption being that the investor takes a systematic investment plan (SIP) on the scheme and investors regularly an equal amount on the tenth of every month. If during the same period, he had invested an equal amount every month in the HDFC Index Fund - Sensex Plan, another index fund on the Sensex, he would have earned 25.75% during the same period. As already mentioned, the Sensex during the same period gave a return of 13.7%.

So the next time you are tempted to watch a business news channel to try and understand why the Sensex fell on a given day, just remind yourself that there is a better and easier way of investing in the stock market.

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